Mulakkal, however, won't be allowed to enter Kerala and has been asked to surrender his passport.
He also has to report to investigating officer once in two weeks, till the final report is complete.
Mulakkal was arrested in September after widespread protests.
Earlier, Mulakkal's rape plea was rejected by Kerala HC
Earlier this month, the Kerala HC had dismissed Mulakkal's bail plea.
Justice Raja Vijayaraghavan dismissed the plea while accepting the prosecution's argument that the accused, holding a high position in society will try to influence witnesses in the case if he is granted bail.
The justice also noted police had to record more statements of fellow nuns in this case.
Backstory: Nun alleged Mulakkal raped her multiple times
In June this year, a nun complained she had been raped by Mulakkal, former Bishop of Jalandhar diocese, multiple times in three years.
She said the church's inaction forced her to approach the police, and the case gained national attention.
In an affidavit, police corroborated the nun's claims of repeated rape. Mulakkal denied the allegations and said it's a ploy to tarnish the church.
After protest by nuns and interrogation, Mulakkal was arrested
Mulakkal was arrested after two days of interrogation by SIT formed to investigate the case.
The nuns of the state had been demanding his arrest for days. The Save Our Sisters council said they would continue the battle until justice isn't given to the victim.
"Truth cannot be undermined. Justice will be delivered in the end," said Fr Augustine Vattoli, the coordinator of the council.
Granted bail but not without conditions
Kerala High Court has laid down the conditions that Bishop Franco Mulakkal should not enter Kerala should surrender his passport before the court. https://t.co/qvd7FsQgfy